Newbie Option Question

Discussion in 'Options' started by Sybreed, Oct 5, 2008.

  1. Sybreed


    Lets say for example that you decide to sell an OTM call option on a stock.

    Expiration day rolls around and the option is still OTM.

    Are you required to buy back to option to close the position?
  2. MTE


    No, it will just expire worthless. However, even if the option is OTM at the close on Friday you can still get assigned on it so if you do have a chance to buy it back for a nickel or even a dime then it would be a prudent thing to do.
  3. dmo


    I double, triple and quadruple second that emotion. Any time you can buy a short option back for a nickel or a dime, just do it. Make it a habit. One of these days it will save your butt big time.
  4. Agree.

    But don't be stupid about it.

    Buy it back as soon as it gets to that low price. Enter your bid on a daily basis.

    Don't wait until expiration Friday arrives.

  5. Sybreed


    Thanks for the replies and worthwhile advice.

    Although I tried entering a sale of an OTM put option today and apparently it is not allowed through my broker. I am using Scottrade. (It was not a financial stock).

    Perhaps it is against their policies & I should switch to a better brokerage as soon as I can.

    Suggestions are welcome.
  6. 1) Scottrade is as bad as they come. Find another broker

    2) Next time ask first. Not every broker allows the sale of cash-secured naked puts.

  7. affan


    Just wondering, what happens if it gets assigned to you? I currently have a OTM option selling at a dime. From your replies seems like it be prudent to buy it back!
  8. 1) If you are assigned an exercise notice, you must sell 100 shares of stock - at the strike price. If you do not own the stock, then you must sell it short.

    Scotttrade does not allow the sale of naked calls, so I assume you are covered.

    2) Yes. Over the long term you will find it to be a good idea to repurchase options that become cheap. You can pay that dime, or you can bid a bit less. But don't screw around for a couple of pennies.

    3) There is nothing wrong with being assigned. Many rookies consider than to be a bad thing. I don't. I means you achieved the maximum possible profit from your covered call position.

  9. affan


    Ok, but my option is deep OTM, so i guess its better to buy when it is OTM but close to strike price.
  10. That depends.

    If you want to earn the maximum profit on the call you sold, then allow it to expire worthless.

    But, while you are waiting, you stock may decline by a point or two (or ten). If you want to continue to write covered calls, then it's better to pay 5 cents to cover and then sell a new call that expires in the next month.

    That gives you a small amount of downside protection. But, you get to sell the next month option now, instead of losing almost wo weeks worth of time decay.

    Thus - what's more important to you (and there is no 'best' answer for everyone)? Earning that extra nickel, with the hope that the stock rallies, or rolling your covered call option and collecting addition protection now?

    Your choice.

    #10     Oct 7, 2008